Dissecting the clues for the world economy: Japanese bond yields, declining prices for equities and commodities, a divergence of opinion about local finances, the influence of American finance regulation (for good or ill), and rethinking “too big to fail” vs. “too small to diversify” in banking regulation…
Japan’s 20-year bonds rose the most in 17 months as concern Europe’s fiscal crisis is worsening boosted demand for the relative safety of government debt. Benchmark 10-year yields touched the lowest level since December before Treasury Secretary Timothy F. Geithner visits Germany and the U.K. next week to discuss the European debt situation. Five-year yields touched levels unseen since 2005 as stocks slid and the Bank of Japan kept interest rates near zero yesterday. The BOJ conducted its third same-day operation this month to boost liquidity and said it would provide one-year loans to banks to encourage lending and defeat deflation.
“Japan’s 20-Year Bonds Rise Most in 17 Months on European Crisis,” Bloomberg BusinessWeek
…the declines in stock market values and commodity prices since April have only served to reverse the gains in March. So perhaps it’s most accurate to describe developments so far not as a conviction that we’re on the verge of replaying events of 2008, but simply as a realization that the global economic recovery is not as strong as it appeared to be just a month ago. But the news coming next out of Europe and China will be watched with great interest by the rest of the world.
“Europe and the world economy,” Econobrowser
So one part of the sovereign debt concerns which are currently so preoccupying the financial markets is associated with the containability of state debt in the context of ageing societies, and this issue is further complicated by the fact that different developed societies are ageing at different rates. This underlying uneveness is leading some people to draw some surprising conclusions. For example, according to a Financial Times/Harris opinion poll published this morning, the French turn out to be the most nervous of developed economy citizens when it comes to thinking about the sustainability of their country’s public finances.
Some 53 per cent of those polled in France thought it was likely that their government would be unable to meet its financial commitments within 10 years, while only 27 per cent thought this outcome was unlikely. Americans were only slightly less worried, with 46 per cent saying default was likely, against 33 per cent who saw it as unlikely. Curiously, only a third of the British people polled thought a government default was likely in the next 10 years, and I say curiously since on many counts the UK economic position is far more critical than the French one is… On the other hand, the Spanish respondents were remarkably more positive about their situation, with only about 35 per cent of Spaniards questioned saying they considered default to be a likely eventuality over the next decade. Which is strange, not because I have any special insight into whether or not Spain will default, but Spain’s problems are clearly worse than any of the other three aforementioned countries…
“Much Ado About (Some Of) The Wrong Things,” A Fistful of Euros
Given the mess that the U.S. has made of financial regulation throughout its history, it is a wonder that authorities in other countries continue to look to us as a model in this area. In the 19th and early 20th century, limits on U.S. bank branching produced as many as 30,000 tiny, mostly unit, banks with waves of failures on numerous occasions. These failures led to persistent attempts to put a financial safety net under the banking system, an effort that failed in Congress 150 times (based on the ample evidence from the failures of states’ deposit insurance systems) before succeeding in the Great Depression. That calamity also saw the separation of commercial and investment banking despite what we now know — namely that the securities underwritten by bank affiliates declined in price by less than others (Kroszner-Rajan), and that commercial banks with investment banking affiliates were more stable, not less (White).
“U.S. Financial Reform: Don’t do as we say, or do,” Finance: Facts and Follies
Many commentators have called for regulation to prevent banks from becoming “too big to fail”. This column adds a cautionary note. A world with only small and domestic banks is no safer. The key benefit of multinational banks – being able to mobilise funds across countries – could still be extremely useful for maintaining stability in times of distress.
Giacomo Calzolari, et al.
“Multinational banks: They did not run away during the crisis,” VOX